Monday, 25 January 2021

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Aegis Custody’s Wei: “We're creating digital trade receivables in a $500 billion market”

Interviewed By Foo Boon Ping

Serra Wei, founder and CEO of Taiwan-based Aegis Custody, discusses the market potential of digitalised trade account receivables as an alternative investment asset class and what the company is doing to make it accessible to investors worldwide, including high net-worth individuals and family offices.

On 8 December 2020, Aegis Custody received approval from the director of the South Dakota Division of Banking in the United States (US) to register and incorporate a non-depository public trust company in the American state and to operate in the country.

With the issuance of the trust service charter, the company will become one of the first digital asset custodians to operate in two continents across the Pacific, with regulated fiduciary services in Hong Kong, where it was licensed in July 2019, and the US.

The binational licences will bolster the company’s efforts to digitally transform traditional finance with its regulated asset custody and digitisation solution. It enables asset owners to digitise any physical assets, store them on blockchain, to be invested in and traded. This includes anything from recurring cash flow assets to commodities and private debt to private and public business holdings and assets held in trust. For investors, this means access to new digital asset markets for portfolio diversification. Digital assets are stored on its proprietary cold storage wallet solution, Aegis Pen, which offers institutional-grade security to asset holders operating on various public and private networks.

In this interview, Serra Wei, Aegis Custody founder and CEO, discussed:

 

The following is the full edited transcript of the interview.

Foo Boon Ping (FBP): We're very happy to be speaking with the founder and CEO of Aegis Custody, a Taiwan based digital asset, custodian and financial technology service provider that is also operating out of the US and recently has received approval for a trust charter application by the director of the South Dakota division of banking, Serra Wei. Thank you for taking our interview. And I like to start off by asking you where is the industry at this moment? And what is the significance of being licensed in both Hong Kong and in the US?

Serra Wei (SW): Thank you so much for introduction, it's really an honour to be on this interview. In terms of how this market has evolved, we're really at an exciting era where we're seeing the so-called new asset class, the cryptocurrencies, have now become a mainstream asset being recognised by a lot of the alternative investors. And at the same time, we're also seeing blockchain technology, smart contract technology become more mature as a way for digitalising traditional financial products. The importance of Aegis Custody having both licences in Asia as well as the US really is it puts us in a global position because we're dealing with a lot of the investors, they were looking on a global scale, they are also having preferences, whether they want to invest in certain areas or keep their assets in certain jurisdictions. So, the flexibility we offer as custodian in both places allow them to essentially transfer or move money across regions seamlessly without additional tax or with a lot of privacy. So, I think we are Investors, mostly institutions, whether they are regulated asset management companies, listed companies, public traded or even family offices, they are looking really for more sophisticated products as in the alternative space as well as a much more robust and reliable and trusted infrastructure and service partners that can really help them get into the space and feel comfortable.

FBP: Tell us in terms of the entire digital finance ecosystem and the important role that digital asset custodian and trust services play in giving comfort to institutional investors as when you trace the development of digital assets from inception. You need a regulatory environment. Custodian services. You have two platform besides Aegis Custody, you have Optimi Factor and Optimi Invest. And your focus is more on tokenising traditional finance, as opposed to introducing cryptocurrency as an investment class. Give us some insight into how you play in the asset origination or asset ownership front.

SW: As a custodian, we actually keep track of the ownership changes of assets. If you think about an asset lifecycle, you start with asset origination, transfer and then maturity. And all this lifecycle now can be recorded on blockchain. Because smart contracts keep track of that. This is how we think about the custodian side and the asset custody. And then we think about how can we bring more assets that are in the digitalised form, because there's so much more benefits in terms of operational efficiency when things are digitalised. That's why we built the platform called Optimi Factor essentially, making it much more quicker and faster to do factoring, account receivable business. And the reason why we choose account receivable is because we wanted to create a new industry, just like the mortgage backed securities in the 1980s. When it first started in the 1980s. And a decade later, it has grown one very small industry to a $200 billion industry. In the next decade to $700 billion industry. In the next decade, it became a $1.7 trillion insurance market. And we see trade finance is a $46 trillion market, five times more than the mortgage market. And previously, this market is untapped because everything is based on paperwork. And now because of this digitalisation solution, we're able to digitalise this whole industry in a much more efficient way and allow institution investors on the other hand, to be able to not only get assets, but being able to manage the products.

FBP: The growth trajectory that you mentioned is a $46 trillion market. At this point of how big is this market? That is for trade finance, traditional documentary trade, or more specifically, supply chain financing, factoring, account receivable discounting and so on so forth? At this point, how big is the industry? And for factoring? you cited global numbers in Asia, how big is the market in the US? How big is the market?

SW: Factoring itself is I will say a $100 billion to $500 billion market globally. And Asia accounts for around 30% of that number. It's huge, and it's growing really fast, because the need for trade finance or need for supply chain finance has grown exponentially as you see in the numbers. The market itself is growing. Within the whole market. We also focus in the faster growing industry in the ecommerce space. Now we have many ecommerce marketplaces that are allowing more small and medium companies to sell on the platform. And because of COVID-19, more and more people that shop online buying new services online, and it requires a lot of merchants of higher working capital to meet really higher demand. The ecommerce nature of account receivables is shorter in duration, ranging from 14 days, 30 days, 60 days to 90 days, and then it's much in the higher frequency compared to the traditional manufacturing, supply chain receivables. And that's why risk for technologies is higher, and that's why our competitive advantages are also higher.

FBP: Tell us how are you tapping the market right now? We read that you have a collaboration with CTBC Bank in Hong Kong, is that specifically to tap into this supply chain financing, factoring discounting market? Who are your clients at this point?

SW: Banks certainly are the partners, the clients, because banks have traditionally been in the factoring business. But I think our real value added to the industry is not only to serve traditional banks, but also to make account receivable an investable product. For whom? For asset managers, because previously, it is not an asset class that is accessible to asset management firms, because it involves quite a lot of paperwork, it couldn't be transferred. There's no easy way for them to manage it and get into this asset class. And now, we not only make it listable, but also transaction-able. And I think that's why we're partnering with asset management firms here in Taiwan to launch private equity like private placement funds to purchase this type of digitalised account receivables. And it would be a breakthrough in the industry where we are seeing more and more asset management firms being able to recognise the value added of the new industry as well as we are seeing blockchain is not something that scares them. Blockchain is something that will enhance some of their operations and work.

FBP: Now, you're working with private equity firms in Taiwan in the US in terms of originating some of these assets and, and the asset owners will be the private equity funds. And they will be listed and traded on the crypto exchanges. Tell us in terms of the other part of the ecosystem, are you also looking at creating your own digital asset exchange, or you are working within the existing infrastructure and ecosystem and tell us also, in terms of the scale of the business? Are you right at the cusps of just taking off?

SW: Our business really spun off of fund, corporate banking, trust, custody, asset management, investment platform to wealth management, because we're dealing with the whole asset class. We actually have to deal with many counterparties in the ecosystem. So we work with asset management firms, for them to launch their private equity funds or funds, we also have to work with banks who are traditionally the master custodian bank, with those asset management firms. So Aegis Custody, using our license in Hong Kong and US, play a sub custodian role to the master custodian bank. The master custodian bank handles investor money, and we handle those securities or the digitalised forms, certificates, for the master custodian bank. And then together with the asset management firm. There is already, we're plugged into the existing ecosystem, and allowing them to access new type of financing opportunities, new type of investment opportunities, and in a new form, but for them, we are still being able to do both traditional custody and then digital custody. So friction is less because we are able to use statements that they are familiar with. However, how do we run this process has already been changed and become more efficient.

FBP: What's the scale of your business now, in terms of assets under custody, the assets that you have originated through Optimi?

SW: We're really at this fast-growing stage. We're aiming to reach $125 million asset under custody in the first half of next year. We bring on assets from five different sources, including the ecommerce space, including the traditional large supply chain anchor companies, the Foxcon suppliers, the Qualcomm and Compal, the manufacturing suppliers that are globally in Malaysia, Indonesia, and India, in Vietnam. And those companies are all supplying part of the manufacturing goods to the big manufacturers. So those are the type of assets we're dealing with. And, just within the ecommerce space, we're seeing two times the growth, doubling the ecommerce purchasing this year. And then we see a lot of demands for every of the merchants, as well as the platform companies that want to get these financing. So the $100 to $125 million number is conservative. I think the demand in the market is much higher than that. From our side, we're really expecting to grow to $500 million in asset under custody in 2022. And then, next year, we're projecting to be $700 million, in the year to be, $1 billion assets under custody. So growing with this fast, growth path industry, and then also to facilitating creating this ecosystem where we work with small and medium companies in the supply chain, making these receivables as an investable, fixed income, product, putting those on our investment platform product team, and allowing global investors to come in whether they are $100 billion asset management firms, or they are individual investors to participate and provide capital and liquidity to those small and medium companies on the platform.

FBP: The assets are just starting on stream. It will be reasonable to assume that there aren't any investors yet. Are you building that part of the business in 2021?

SW: We already have some existing investors that are: public traded companies, the treasury division, buying those digitalised account receivables as a way of managing their existing cash flow. Compared to saving their money and putting it into bank, which they earned less than 1%, or even lower interest rate, they're getting a 5% to 8% interest within a quarter, which are also safe and secure, it's a really good investment products or tools for the CFOs within public traded companies. We've seen growing demand from the corporate investors. In addition to that, we have family offices, because family offices have been familiar with alternative asset class. They are also looking for ways to not only protect their capital, but also to earn yields for their capital. And in addition to that, like high net worth individuals, they are traditional just buying corporate bonds, now they have more variety of assets to pick up from and just and also just because we have been getting investors on our company for products, now we're working with asset management firms, they're raising $100 million funds, they're raising bigger funds to purchase the asset and growing the fund size through different channels.

FBP: And those investors are coming through directly onto your Optimi Invest platform. Are you also working through other parties, exchanges to list some of these assets? Or does it make sense to do that kind of collaboration, or through other portfolio management platform? to aggregate liquidity?

SW: This is also an exciting time because we're now seeing more exchanges that are tethered to digital assets and currencies. We have been talking with exchanges in Hong Kong, Singapore, Switzerland, in US to offer our products and list our products on their exchanges. But having said that, this is even for those exchanges, for example, we talked with one that just got the first exchange licence in Hong Kong yesterday. It was the first one. So the industry is really become more mature, to be able to offer new type of liquidity for financial products and we're really fortunate because I think everyone in this ecosystem is pushing the frontier forward.

FBP: How do you see this ecosystem developing? At this point, there are many players. Do you see them as competitors as potential collaborators? In Hong Kong, for example, there are quite a number of licensed digital trust companies, for example, Hex Trust, First Digital Trust, etc. In Singapore, you have Diginex, and there are new players coming, news of Standard Chartered working with Northern Trust, coming out with something called Zodia, a cryptocurrency custodian. DBS announcing that they will create a cryptocurrency exchange as well. So you have more mainstream players coming into this marketplace, coming into this arena? How do you see them? Are they potential collaborators? Will you be working off white label, to work with some of these more mainstream institutions?

SW: I view it very positively, because I think we really need more infrastructure players in this space. Yes. We provide an end-to-end solution to people who are the asset owners, and as well as being able to get access to investors more on the primary market side. And we tap into this huge market with private debt and account receivables. And everyone in this industry is looking for very high-quality assets. Because people want to see huge evidence that we now being able to have new form of the assets that are not accessible in the traditional place. So we're unique in the sense where we're also in the first place with those assets. So unlike real estate where you issued once, and then it's just there, was our recurring type of assets. So we are talking very happily with exchanges in those places that you have just mentioned, to be able to offer unique products that can also provide interest to their existing investors. And I think in terms of the competition landscape within the custodian space, I am proud to say Aegis is really the only binational custodian that can both do traditional type of asset custody and digital type of asset custody and we combined this workflow, easy for also digitalisation process.

FBP: And between the two markets, the US and Asia of which do you see as a bigger market for asset origination? You talk quite a lot about Asia. In the press release, it says it is possible now for Asian investors to be also investing in American assets without money leaving Asia?

SW: We're looking for, higher yield assets, which are, I would say starting right now in in Asia, but we also see opportunities in the US. So right now, just because in Asia, the interest rates are in certain places are higher. So we're able to find good quality assets that are also with manageable risk. And also because think about even in the ecommerce space, over 20% of the merchants on the Amazon platform are coming from Asia. So there is a very sizable merchants in the space that have this kind of financing needs. But they're also great merchants in the US as well. And we can tap into those. So we are dealing with asset origination with firms in Asia and also selling those products worldwide, not only Asian investors but also US investors at the same time, because we are pretty plugged into this space. So we're also able to find good assets in the US Specifically I will say we have been reached out by many very large players in the non-tradable REIT space, so private equity firms treated like non-traded REITs. They have individual investors, mom and pops, that put in $50,000 for their retirement money, but it is REIT, 10, 15, 20 years close-ended. And they're looking for liquidity and the ability to use a platform that we created is a huge benefit for them. So those type of high-quality assets are something in it something we were very highly interested. And those are also like SEC registered. So like high quality type US assets.

FBP: And in Asia, you mentioned the focus for some of these ecommerce companies that may require supply chain factoring services are in Taiwan, in Southeast Asia. What about in Greater China? We know that in China that there are a lot of distributed ledger platforms where they are already securitising some of these assets. How do you see the Chinese marketplace? Are there opportunities for collaboration with some the local platforms? In Southeast Asia and in Hong Kong, the other platform like Velotrade, in Malaysia, you have CapBay, in Singapore Validus Capital. Are those potential partners as well? because they are the platforms which are lending out based on account receivables, is there an opportunity to help them tokenise some of those assets?

SW: We have been working with Greater China, Hong Kong based ecommerce merchants, and there are a lot of them over there. And that's actually a very, very focused market within Asia. And in terms of those players, we are happy to work with other factoring companies that have asset sourcing capabilities, because our ability to offer a digitalisation solution could be applicable to them too, because we can also bring in the bigger capital market into the space to purchase those assets. So I will see it as sort of competing, but also being able to collaborate.

FBP: How do you see 2021 panning out with the end of COVID? It's been a catalyst for a lot of digitisation, a lot of interest in this area. How would the end of COVID change things? What is your outlook for 2021?

SW: The ecommerce space is really, really accelerating the digital path. And that's a benefit to us. We want to work with those industries that already with higher digital capabilities instead of doing the traditional type of factoring business. So that's one, and we're seeing that trend will continue instead of and become much faster, will be accelerating. Whether it is now or post COVID era, because I think people's behaviour has already been changed. I mean, for the past year, I think there's a big change. I mean, previously, I've been staying in the Bay Area in the states for seven years. I mean, most of COVID. So right now I am in Taiwan, I think a lot of people also fly to Taiwan. Relatively functional place to work. I certainly see much greater change of behaviour even for for work.

as well. And just think about it. So previously, banks require many manual due diligence, so they have to fight over because they don't have any other information. They don't have data. They said they need to be able to see and to feel and look at all those documents to be able to trust those companies. But if you think about in the ecommerce space, everything is digital, like the Amazon provides API for merchants. And you can directly get data on real time basis and monitor the payment orders and monitor the cash flow back fund the e commerce marketplaces. And that's a much efficient way to be able to transact business. I think COVID accelerates the growth in the digital era, that and then, and that also helps us differentiate the fund those traditional players. So when we look at our competitive landscape, we were really competing with like, traditional banks that were doing securitisation, but it was not sufficient, because previously, the whole process is very lengthy and can take up to two years. But now, everything is digital, and we build this automated process for asset owners to onboard the assets more smoothly, more quickly and easily. Now, we're able to complete the process from two years to two days, and that's huge and much more efficient than the traditional world.

FBP: One area that I haven't touched on is on Aegis Custody itself. How are you funded, your investors and your roadmap on the capital and funding front going forward, and milestone that you are looking at in 2021.

SW: Aegis, we started in 2018, June, and we raised a seed fund at the end of 2018, funded by Fosun, a Hong Kong listed company that manages over $100 billion assets now. We are really fortunate to have such large institutional company to be on our back and to be able to tap into the asset management space. So now, we are raising our “A” round and we are really looking for strategic investors, especially when we want to grow into Southeast Asia where we have a lot of interest  starting to from Japan like foreign investors or financial institutions there where they are looking for yield generating products and those are great complementary strategic investors for our company growth. So our target for next year is to reach $125 million assets in our custody under receivables space.

Looking for a few investors in South East Asia that have a lot of supply chain and other merchants as well as investors that perhaps from Japan, which they are all looking for deals generating products.

FBP: When do they expect that to be kind of coming?

SW: Hopefully before Chinese New Year.

FBP: Thank you so much, Serra, for speaking with us.

SW: Thank you so much. We really appreciate your time.


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